The present invention relates generally to methods and apparatuses for managing portfolios of securities for small investors, and more particularly to a method and apparatus for managing a portfolio of securities for a small investor, in which the small investor is able to measure, test and manage taxable events caused by buying, holding and selling securities within the portfolio.
Currently, investors seeking to transact in securities to obtain a specific tax result such as a certain amount of capital gain or loss must keep track of the specific tax lots of the security they own and then designate the appropriate lots to obtain the desired result, with the broker then required to confirm back to the investor that the specific designated securities have been sold. Often, the paper work, record-keeping and tax analysis required is beyond the means of most smaller investors. The broker or whoever holds the securities must also keep track of the securities as specifically denominated securities so as to be able to track the tax effects and be certain that the correct securities are being sold. If the securities cannot be tracked, then the first-in, first-out method is supposed to be used for calculating taxable gain or loss; for mutual funds, an average basis in the mutual fund shares held by the investor may be and usually is used for such calculation.
An investor buying securities may have both a gain and a loss, or only a gain or only a loss, or no gain or loss, in any particular security. As an example, an investor who purchased 11 lots of 100 shares of Motorola stock over the course of ten weeks at prices of $40, $42, $44 $46, $48, $50, $52, $54, $56, $58 and $60 would have an overall gain on the entire 1100 shares of Motorola if the current price was above $50, an overall loss if the current price was below $50 and no gain or loss if the price was at $50. However, looking at each lot separately, if the current price was $50, the investor would have a gain--if he sold--any of the lots bought for less than $50, a loss--if he sold--any of the lots bought for more than $50 and no gain or loss if he sold the one lot purchased at $50 or the lot bought at $48 along with the lot bought at $52, etc. Similarly, if the current price was $56, the portfolio as a whole would show a gain, but the investor could achieve a loss if he sold at that price only those lots acquired with a tax basis above $56 (i.e., the lots acquired for $58 and $60), and none others or only those that did not eliminate the gain (such as the lot at $56 and the lot at $54 along with the lots at $58 and $60). Obviously, depending on what is sold, the tax results change, as does the amount of cash generated by the transaction. It is very important to investors to be able to control both the cash to be received and the taxes to be paid within the limits of the economic gain and loss they have achieved. If an investor can obtain $100 cash without a taxable gain, then that is worth more (by the amount of the tax bracket times the cash received multiplied by the time value of the money for so long as the tax remains unpaid) than obtaining $100 cash where current taxes need to be paid on that cash.
It is very difficult for an investor to keep track of all these separate lots and results if he has multiple securities bought at a variety of times at different prices, especially when the selling prices of the securities changes frequently, thereby changing the results frequently. Moreover, it is difficult to recognize the relationship between the amount of cash that can be received from the sale and the tax effects, and it is difficult in the case of multiple securities and multiple lots to communicate the information to a broker easily to ensure that the correct securities are sold at the specified prices to effect the desired result.
In a system like the one that is described in U.S. patent application Ser. No. 09/139,020 an investor is permitted easily to engage in strategies such as "dollar averaging" where a small, but constant, amount--such as $100 or $1,000--is invested periodically (e.g., each week or month) in a multitude of securities at whatever the prevailing price may be. In that event, it would be almost impossible for an investor currently to maintain the appropriate tax records and to have a system that would allow the investor to understand the tax and linked cash implications of possible transactions and then obtain the desired tax and cash results, especially where the capital assets being transacted are bought and sold at prices that change frequently (such as securities). In addition, it is very difficult for an investor to understand the remaining available tax-cash positions that result after a change in a complex portfolio due to the sale of selected securities from, or purchase for, the portfolio. In addition, it is very difficult for an investor to understand and manage the tax-cash implications that result from combining potentially short and long term capital asset tax implications with gains and losses and then to be able to obtain the desired tax results by executing transactions that provide the desired results. It is also very difficult for an investor to understand the interactivity of the tax implications from transactions in selected assets with the overall tax results that the investor incurs taking into account other taxes, such as income or other transactions in other assets or liabilities. It is also very difficult for an investor to understand the effects that time will have in converting short-term gains into long-term gains in a plurality of securities or trade lots bought at different times. Finally, it is difficult to determine these tax-cash implications, and their related portfolio implications, in the context of a managed portfolio of assets.
The present invention is therefore directed to the problem of developing a method and apparatus for enabling a small investor with a portfolio of securities to understand and manage the related taxable events and cash implications created by buying and selling securities (which could include mutual funds) in a complex portfolio.